Lower insolvency fees not the answer

Chris Mallon says the Ferris report is surprisingly good news for practitioners. Chris Mallon is head of insolvency at Biddle.

July 1997 was not a particularly good month for insolvency practitioners.

In a Luxembourg judgment, the liquidators of the Bank of Credit and Commerce International (BCCI) had their fees for the gestion controllee reduced substantially. Later that month Mr Justice Ferris strongly criticised fees charged by insolvency practitioners and their lawyers in connection with the court-appointed receivership of the Maxwell estate.

These decisions focused public and political opinion on fees charged in insolvency proceedings and led to a flurry of press articles and speeches. As a result, a working party was set up under the chairmanship of Mr Justice Ferris to examine insolvency fees. The working party's report was finally published this August and insolvency practitioners should be well pleased with its findings.

Particularly welcome is the report's recognition that keeping fees down to a minimum is not necessarily in the best interests of creditors.

As the report says, it is in the best interests of those entitled to assets and the general public that the insolvency practitioner “shall carry out duties with proper skill and care”. It says these duties “require that persons having proper qualifications, experience, skill and integrity shall be available to perform the duties of office-holders” and that these conditions will only be fulfiled “if such persons can expect to receive reasonable remuneration for services”.

The report concludes that “the lowest rate of remuneration will not necessarily be the most advantageous”.

I worked for many years on the collapse of BCCI. In late 1991 we were faced with a stark choice. If we could not negotiate settlement with the Abu Dhabi government, we could expect years of litigation and the likelihood that assets left in the estate would be dissipated. If we could settle with Abu Dhabi, then there would be a modest return to creditors.

But the tenacity and skill of Deloitte & Touche and its lawyers, means creditors can expect to recover more than 50 cents in the dollar. Banco Ambrosiano and Barings creditors were nearly all paid in full. In each of these cases the costs were high, but were totally justified by results.

Insolvency value means dividends to creditors. If these are in line with, or exceed, expectations there are unlikely to be serious fees objections.

Paying big dividends, however, can mean taking risks and taking risks means that once in a while you do not succeed. As the Ferris report recognises, pressure on fees may penalise creditors in the long run if insolvency practitioners are not adequately paid for taking the risks to make the big recoveries.

The Ferris party has also recognised that requiring insolvency practitioners to justify their fees must be balanced against costs. The report says: “Overzealous recording of the minutiae and exact timing of an office-holder's activities is a waste of the their time and the creditors' money.

Instead, it says we need “sufficient information to give creditors or the court a clear view of what the office-holder has done or intends to do and of the value he has protected for the creditors.”

I can only agree.